Veto of UK mobile merger sends chill across Europe

The European Commission on Wednesday harpooned CK Hutchison Holdings’ £10.25 billion bid to create the largest mobile phone operator in the U.K., by merging its Three brand with O2, a subsidiary of Spain’s Telefónica.

It was Competition Commissioner Margrethe Vestager’s first official veto and a flashing stop sign for industry executives who argue consolidation is the only way to pay for costly innovation needed across Europe’s €122 billion mobile telecoms sector.

“The U.K. mobile market shows the opposite … Competition, not consolidation, has promoted investment,” Vestager said. “Allowing Hutchison to take over O2 at the terms they proposed would have been bad for U.K. consumers and bad for the U.K. mobile sector.”

Hutchinson said it was disappointed by the ruling and is considering a legal challenge. Telefónica declined to comment but filed a statement with regulators saying its financial targets remain unchanged.

Vestager’s verdict was widely anticipated and comes just weeks before the U.K. holds a referendum on the country’s membership in the European Union. The U.K. telecoms and antitrust regulators both lobbied Vestager this year to block the deal.

And while some may blame Brexit fears, Vestager had already made clear she is worried shrinking the number of competitors leads to higher prices for consumers. Last year, her steadfast opposition to a mobile deal in Denmark caused the two companies to walk away. Then, antitrust concerns loomed large as a mobile merger in France collapsed.

“Competition authorities [are doing] greater damage to the mobile market than any in-market consolidation,” said John Strand, a mobile consultant for, among others, Europe’s largest operators. Europe’s competition “agency does not understand what drives competition in the market,” he argued, citing moves by Internet providers, pay-TV broadcastersand even supermarkets to enter the mobile market.

Europe needs about €300 billion to build broadband networks to match rival mobile networks in places like the U.S. and South Korea, according to McKinsey & Co., a consultancy. Meanwhile, the European Telecommunications Network Operators’ Association says average monthly revenue per mobile user was €13 last year, down €5 in seven years.

Stephen Howard, head of global telecoms, media and technology research at HSBC, called Vestager’s ruling “an acid test of whether sufficient weighting is being given to the importance of this investment.”

The next test is coming up fast. Hutchinson is planning to merge its Italian mobile business with rival operator Wind, again creating the market leader.

The stakes in Italy, Europe’s fourth-largest mobile market, are potentially higher given the gap between market leaders Telecom Italia and Vodafone Italia and smaller players Wind and Three Italia.

Hutchinson says its Three Italia, with about a 10 percent market share, is too small to invest in upgrading its networks, while Wind says debts totaling about €10 billion mean it cannot fund new projects on its own. The absence of mobile brands seeking to rent network capacity from the operators points to market stagnation.

“This joint venture will give the combined business the scale and strength to offer Italian consumers and businesses a state-of-the-art network,” said Canning Fok, the co-group managing director of CK Hutchison, last year.

What’s more, the Italian market does not suffer from the structural issues that affected the U.K.

London calling

Hutchison and Telefónica signed their deal in March 2015. The takeover would have fashioned a market leader with almost 33 million customers.

Hutchison’s management said it would give Three access to more mobile spectrum, allowing it to respond to ever-growing consumer demand for data and quality connections. Meanwhile, Telefónica wanted the cash to shore up its financial health and focus on key markets.

The U.K.’s €20 billion mobile market is in upheaval, as data use rockets and Internet firms, broadcasters and supermarkets start to offer cheap mobile deals. The country’s incumbent telecom operator, BT, bought the U.K’s largest mobile operator EE earlier this year, giving Hutchison fresh reason to bulk up and hope that its own merger would be approved.

José María Álvarez-Pallete, chief executive of Telefónica, said on April 29 the companies offered concessions to preserve competition that were “unprecedented” in scope. He speculated the Commission’s reasoning was “probably” contaminated by “political reasons, especially in the context of Brexit which is basically contaminating all debates.”

Four is the magic number

However, Antonios Drossos of mobile consultancy Rewheel said the Commission has made clear it will no longer approve telecoms acquisitions that reduce the number of players in a market to just three.

Last year Telenor and TeliaSonera tried to merge their Danish mobile units, in a combination that would have left just three network operators in the market. But they abandoned the plan after seeing red flags in Brussels.

Just last month, intense negotiations between France’s market leader, Orange, and the number three, Bouygues Telecom, collapsed, with competition hurdles as a major reason.

Asked why mobile mergers in Austria, Ireland and Germany were approved while recent in deals in Denmark and the U.K. were not, Vestager reiterated Wednesday that she doesn’t have a “magic number.”

“Some of you may be wondering what this decision means for other mobile merger cases. In short: nothing new. We assess each case on its own merits.”